Essential Corporate News: Week ending November 18, 2022

IOSCO: Statement on Financial Reporting and Disclosure during Economic Uncertainty

On November 14, 2022 the International Organisation of Securities Commissions (IOSCO) published a statement on financial reporting and disclosure during economic uncertainty, emphasising issuers’ need for fair, transparent and timely disclosure about impacts of economic uncertainty. The statement encourages issuers, external auditors, as well as audit committees (or those charged with governance) to be particularly vigilant in times of economic uncertainty in their consideration of how risks and uncertainties that could affect or have affected an issuer’s operations, financial condition, cash flows and prospects can be transparently communicated to investors. 

IOSCO states that issuers should carefully evaluate how economic uncertainty and changes in assumptions affect their operations, create risks of fraud and deficiencies in internal control, and affect the amounts reported in the financial statements, including but not limited to the following:

• Going concern – Issuers are reminded to consider all available information about the future looking out over a period at least, but not limited to, 12 months from the end of its reporting period that may affect its ability to continue as a going concern and should perform this assessment until the date the financial statements are authorised for issue. If it involves significant judgments or uncertainties, issuers should clearly disclose these matters so that investors can make appropriate risk assessments. 
• Events after the reporting period – Material adjusting events should be reflected in the financial statements before the statements are authorised for issue. For material non-adjusting events, issuers are required to disclose the nature of the event and its financial effect or a statement that such an estimate cannot be made. The disclosure of additional information that may affect business operations and trends, such as changes to strategic plans, should also be considered. 
• Updating and assessing significant judgments, estimates and estimation uncertainty – Issuers are reminded of their responsibility to transparently disclose information about assumptions and material uncertainties in a way that helps investors understand significant risks of adjustment to the financial statements in future periods. Clear and transparent disclosures should be provided, including giving consideration as to whether information about the susceptibility of carrying amounts to change and the range of reasonably possible outcomes would be appropriate. Issuers should also be mindful of other factors which may affect the reliability of previous assumptions, including changes in circumstances, shifts in the geopolitical global financial climate resulting in a significant increase in credit or liquidity risk, and current events which may affect an issuer’s compliance with the provisions of a long term loan arrangement.  
• Cybersecurity risk – The increase of cybersecurity risks can impact the issuer’s financial performance or position. In circumstances where cybersecurity incidents could be material, investors could benefit from timely disclosure including a description of the cyber incident and its impact on the issuer’s financial position results of operations and business. 
• Non-GAAP financial measures (also referred to as Alternative Performing Measures) – Issuers should be mindful of the elements of reliable and informative non-GAAP financial measures that are not potentially misleading and should carefully evaluate the appropriateness of an adjustment or alternative profit measure. In addition, it would not be appropriate to use hypothetical scenarios when presenting a measure of sales and/or profit.

The statement reminds external auditors of certain responsibilities, including (amongst others) the responsibility to apply professional scepticism when considering the consequences of the current economic uncertainty on issuers’ financial statements and related disclosures and to conduct robust risk assessments and update the risk assessments when planning and conducting audits to ensure the audit plan reflects the impact of economic uncertainties on issuers. Where there is a going concern uncertainty, external auditors are reminded to scrutinize management’s going concern assessment and plans to mitigate uncertainties, evaluate the reasonableness of management’s assumptions and corroborate them with third party evidence when available, and evaluate the appropriateness and completeness of management’s disclosures. When evaluating all audit evidence obtained, auditors are reminded to step back and consider all information in the light of the current economic uncertainties when coming to a conclusion about going concern and, for instance, measurement of assets and liabilities. 

Finally, the statement encourages audit committees to engage in open, timely and meaningful dialogue with management and external auditors. Oversight of the financial reporting and audit processes by the issuer’s audit committee supports the provision of reliable, high-quality information to investors.

(IOSCO: Statement on Financial Reporting and Disclosure during Economic Uncertainty, 14.11.2022)

(IOSCO: Statement on Financial Reporting and Disclosure during Economic Uncertainty, press release 14.11.2022)

Glass Lewis: 2023 UK Proxy Voting Guidelines

On November 17, 2022 Glass Lewis published its updated UK Proxy Voting Guidelines for 2023 (Guidelines).

The Guidelines include revisions and clarifications in relation to a number of areas, including those summarised below.

External commitments

This section of the Guidelines has been amended and extended to outline cases where Glass Lewis believes a director may potentially be overcommitted and to better clarify how its policies are applied. Specifically, Glass Lewis will consider a director to have a potentially excessive commitment level when they serve as: (a) an executive officer of any public company while serving on more than one additional external public company board (this was previously two additional public company boards); or (b) a non-executive director on more than five public company boards in total. It will continue to count non-executive board chair positions at UK companies as two board seats given the increased time commitment generally associated with these roles.

Director accountability for climate-related issues

A new section has been included in the Guidelines which outlines Glass Lewis’s view that climate risk is a material risk for all companies and that companies (particularly those whose greenhouse gas emissions represent a financially material risk) should provide clear and comprehensive disclosure of their risks, including how these are being mitigated/overseen. Glass Lewis may recommend voting against a responsible member of the board or other relevant agenda item(s) where companies with increased climate risk exposure have not provided thorough TCFD-aligned climate-related disclosure and/or have not explicitly and clearly defined board oversight responsibilities for climate-related issues.

General authority to issue shares without pre-emptive rights

This section of the Guidelines has been updated in light of the revised guidelines published by the Pre-emption Group in November 2022. 

Specific authority to issue shares

The Guidelines have been updated to clarify the approach Glass Lewis takes when analysing proposals to issue shares for a specific purpose outside of routine authorities. It is noted that Glass Lewis takes a case-by-case approach in such instances, considering: the total number of shares to be issued and the dilutive impact on shareholders; the issuance price and discount/premium; and the intended use of proceeds in the context of the company’s financial position and business strategy.

Employee representatives 

The independence section of the Guidelines has been updated to better clarify Glass Lewis’s interpretation of an employee representative serving on the board of directors. The Guidelines also clarify that employee representatives are not included when assessing whether at least half the board is independent. 

Cyber risk oversight

The Guidelines include a new section outlining Glass Lewis’s belief that cyber risk is material for all companies and that stakeholders would benefit from clear disclosure regarding the role of the board in overseeing cybersecurity-related issues. This also clarifies that, although Glass Lewis will generally not make recommendations on the basis of a company’s oversight/disclosure concerning cyber-related issues, it may recommend against appropriate directors in instances where cyber-attacks have caused material risk to shareholders and Glass Lewis finds the company’s disclosure/oversight to be insufficient.

Pensions

Glass Lewis has updated the Guidelines to clarify that it generally expects pension provisions for executive directors (both newly appointed and incumbent) to be in line with those available to the majority of the wider workforce by the end of 2022, absent a cogent rationale.

Combined incentive plans

A new section has been included in the Guidelines to better clarify Glass Lewis’s assessment of combined incentive plans in executive remuneration policies. Specifically it clarifies Glass Lewis’s belief that such plans should generally have a minimum vesting period of three years, at least part of the award should be in the form of equity/equity-based instruments, that quantitative underpin/gateway conditions should apply to deferred awards, and that a strategic rationale should be provided for the plan. The Guidelines also clarify that, where a company is amending its incentive structure to adopt a combined incentive plan while removing existing variable incentive plans, Glass Lewis will generally expect a substantial reduction in the total target and maximum award opportunity, appropriately reflecting the reduction in the risk profile of the plan.

Linking executive pay to environmental and social criteria

Glass Lewis has clarified its belief that shareholders of companies that have not included explicit environmental or social indicators in their incentive plans would benefit from additional disclosure on how the company’s executive pay strategy is otherwise aligned with its sustainability strategy. 

Remuneration committee discretion

This section of the Guidelines has been expanded to codify Glass Lewis’s views on certain exercise of remuneration committee discretion on incentive payouts. The Guidelines recognise the importance of the remuneration committee’s judicious and responsible exercise of discretion over incentive pay outcomes to account for significant events that would otherwise be excluded from performance results of selected metrics of incentive programmes. Glass Lewis believes that companies should provide thorough discussion of how such events were considered in the committee’s decisions to exercise discretion/refrain from applying discretion over incentive pay outcomes. 

(Glass Lewis: 2023 UK Proxy Voting Guidelines, 17.11.2022)

Glass Lewis: 2023 ESG Initiatives – Policy Guidelines

On November 17, 2022 Glass Lewis published its updated ESG Initiatives Policy Guidelines for 2023 (Guidelines).

The Guidelines include revisions in relation to a number of areas, including those summarised below.

Board accountability for climate-related issues

The Guidelines include a new section on director accountability for climate-related issues. In particular, Glass Lewis believes that clear and comprehensive disclosure regarding climate risks (including how they are being mitigated and overseen) should be provided by those companies whose own greenhouse gas emissions represent a financially material risk – such as those companies identified by groups including Climate Action 100+. Accordingly, Glass Lewis believes companies with material exposure to climate-related risk stemming from their own operations should provide thorough climate-related disclosures in line with TCFD recommendations. Glass Lewis also believes the boards of these companies should have explicit and clearly defined oversight responsibilities for climate-related issues. In instances where either of these disclosures are absent or significantly lacking, Glass Lewis may recommend voting against responsible directors.

Disclosure of shareholder proponents

Glass Lewis has included a new section regarding its approach to disclosure of shareholder proponents at US companies. Given the growing number of/focus on shareholder-submitted proposals, Glass Lewis believes that companies should provide clear disclosure in their proxy statements concerning the identity of the proponent (or lead proponent) of any shareholder resolutions that may be going to a vote. If such disclosure is not provided, Glass Lewis will generally recommend voting against the governance committee chair.

Racial equity audits

The Guidelines have been amended to codify Glass Lewis’s approach to proposals requesting that companies undertake racial equality or civil rights audits. When analysing these resolutions, Glass Lewis will assess: (a) the nature of the company’s operations; (b) the level of disclosure provided by the company/its peers on its internal and external stakeholder impacts and the steps it is taking to mitigate any attendant risks; and (c) any relevant controversies, fines, or lawsuits. After taking into account these company-specific factors, Glass Lewis will generally recommend in favour of well-crafted proposals requesting that companies undertake a racial or civil rights-related audit when it believes that doing so could help the target company identify/mitigate potentially significant risks.

Retirement benefits and severance

As previously, the Guidelines note that as a general rule Glass Lewis believes that shareholders should not be involved in the design or approval of individual severance plans (with such matters being left to the board’s compensation committee) but that, when proposals are crafted to require approval only if the benefit exceeds 2.99 times the amount of the executive’s base salary plus bonus, it typically supports such requests. The Guidelines have been updated to reflect, however, that Glass Lewis may recommend shareholders vote against these proposals in instances where companies have adopted policies whereby they will seek shareholder approval for any cash severance payments exceeding 2.99 times the sum of an executive’s salary and bonus.

(Glass Lewis: 2023 ESG Initiatives – Policy Guidelines, 17.11.2022)

Law Commission: Decentralised autonomous organisations - Call for evidence

On November 16, 2022 the Law Commission launched a call for evidence asking users and other experts for information on how decentralised autonomous organisations (DAOs) are structured and operated, how the law of England and Wales might best accommodate different types of DAO structures now and in the future and how they might integrate into existing legal frameworks. 

The Law Commission describes a DAO as a novel type of technology-mediated social structure or organisation of participants made up of several composite elements. The novel part is that many of the actions and functions of this type of organisational structure (both in terms of governance and its activities) can be redesigned to use and/or facilitate the creation, modification and maintenance of open-source software-based systems, such as code that performs certain actions deterministically or programmatically, built into a network of smart contracts deployed to public blockchains. 

The Law Commission asks for views on a variety of issues, including (among other things):

• The legal characterisation of a DAO.
• When would a DAO choose to include an incorporated entity into its structure?
• What is the status of a DAO’s investors/token-holders?
• What kind of liability do or should developers of open-source code have (if any)?
• How does/should the distinction between an incorporated company (or other legal form or incorporated entity) involved in software development and an open-source smart contract-based software protocol operate as a matter of law?
• How do DAOs structure their governance and decision-making processes?
• How do money laundering, corporate reporting and other regulatory concepts apply to DAOs, and who is liable for taxes if the DAO makes a profit?
• Which jurisdictions are currently attractive for DAOs and why?

Responses are requested by January 25, 2023.

(Law Commission: Decentralised autonomous organisations – call for evidence, 16.11.2022)

(Law Commission: Decentralised autonomous organisations – call for evidence, Press release, 16.11.2022)